Supreme Court Decision Will Concern Fiduciary Breach Lawsuit

When investment options in 401(k) plans perform poorly, plan fiduciaries risk getting sued. The U.S. Supreme Court this term is expected to resolve a circuit split about whether plaintiffs alleging imprudent investment based on underperformance must plead a meaningful benchmark to survive the motion-to-dismiss stage, according to DeMario Carswell, an attorney with Miller & Chevalier in Washington, D.C.

Policy: 401(k) Plan

The upcoming ruling in the case (Anderson v. Intel Corp. Investment Policy Committee) matters because “if the court determines that a meaningful benchmark is not required at the pleading stage, plans will face heightened litigation risk and plaintiffs will have a significantly easier path to challenging investment selections,” he said.

Fiduciaries Sued

The plaintiff brought the case against the fiduciaries to recover on behalf of the plan all losses related to the selection and retention of poorly performing investment options, said Charles Field, an attorney with Sanford Heisler Sharp McKnight in San Diego, which represents employees.

The investment options were a suite of target date retirement funds that allegedly invested in an assortment of “risky, unregulated nonpublic funds” — including hedge funds and private equity funds, he said. 

Related Article: High Inflation Disrupts Retirement Savings Strategies

However, the 9th U.S. Circuit Court of Appeals agreed with the district court that the plaintiff failed to plausibly allege a fiduciary breach, partly because the alternative investment options offered as performance comparators were not meaningful benchmarks, Carswell said. “The proposed comparator funds were not truly comparable, as a relevant benchmark must share similar investment objectives, strategies, risk characteristics, and asset allocations with the challenged funds.” 

Finding a meaningful comparator for the type of nonpublic funds at issue in the case “is a huge burden,” Field said.

Federal appeals courts are divided as to whether plaintiffs alleging imprudent investment based on underperformance must plead a meaningful benchmark to survive the motion-to-dismiss stage, Carswell said.

Practical Implications for Benefits Administrators 

“Benefits administrators should be closely watching the court’s decision, as it is likely to have several practical implications,” Carswell said.

If the Supreme Court holds that a meaningful benchmark is a required element at the pleading stage and ultimately affirms the 9th Circuit’s dismissal, the decision may provide comfort to fiduciaries when selecting and retaining assets — such as hedge funds, private equity funds, and other nontraditional investments — so long as a prudent process is followed, Carswell said. This includes maintaining a thorough and well-documented decision-making record; regular committee meetings and minutes; robust communication with fiduciaries and investment advisors; periodic and documented fund reviews; and consistent monitoring and oversight by the fiduciary committee.

“Requiring plaintiffs to plead a meaningful benchmark would also place the burden on them to identify comparator funds that are genuinely similar to a plan’s challenged investments, limiting the ability to rely on higher-performing funds selected in hindsight without establishing true comparability,” Carswell said. “Such an outcome would also align with the administration’s broader policy push encouraging greater access to alternative investments within retirement plans.”

However, if the Supreme Court concludes that a meaningful benchmark is not necessary at the pleading stage, plans may face increased litigation exposure, he said. 

“Plaintiffs would have a significantly lower threshold for challenging investment selections, potentially enabling claims based on the mere existence of better-performing funds, even if those funds differ materially in strategy, objectives, or risk profile,” he said. 

Although fiduciaries must maintain a prudent, well-documented process under either standard, a rule eliminating the meaningful-benchmark requirement would heighten the risk that hindsight comparisons alone could be used to infer imprudence, disregarding the strategic considerations that informed the plan’s original investment decisions, Carswell noted.

The risk of being forced to defend investment decisions against incomparable hindsight benchmarks “could deter employers from exploring investment options that may otherwise be beneficial for participants,” he said.

Process Matters

“The key for plan fiduciaries is maintaining a prudent and well-documented process,” Carswell said. This requires a thoughtful and deliberate approach to selecting the investment options made available under the plan, determining which funds to retain, and consistently monitoring those funds to ensure they continue to meet the plan’s objectives, he added.

The Employee Retirement Income Security Act “does not obligate fiduciaries to choose the highest-performing funds. It instead obligates them to follow a prudent process in making and reviewing those decisions,” Carswell said.